We're looking for a significant short-covering rally in gold stocks, suggests Brien Lundin, editor of Gold Newsletter.

In looking at how far this rebound can go, there are two prominent drivers that we need to consider.

First, seasonality is now firmly in favor of gold. Gold is historically strong early in a new year. Over the last two years, the metal has fallen into December and then posted powerful rallies as the calendar turned.

Last year, gold jumped from below $1,200 to just over $1.300 in January alone. The previous year, the metal added about $200 from the December lows to the March highs.

A similar performance this year would undoubtedly result in some high quality junior mining stocks potential double or more in value.

Second, the paper gold market is set-up for a major rally. The cycle has turned in the gold futures markets, with the large speculators now short to the greatest degree since the 1999 turn in the market, while the large commericals are near historically low short levels.

The commercial category of traders includes not only the jewelers and others that hedge in the market as part of their ongoing businesses, but also the big bullion banks who actively trade and move the market in their interests.

The commercials have repeatedly led the speculators to slaughter, building up positions in opposition to the cyclical ebb and flow of the speculators' sentiment.

In October, as the speculators got massively long, the commercials got similarly short and then triggered the fall in gold and collected their winnings.

Now they've set the market up for a move in the other direction, with the commercials buying long contracts hand over fist while the speculators have been loading up on shorts.

The bottom line is that the turn in the market is happening right now and there's plenty of short-covering fuel to go a good way.

We've been accumulating junior gold exploration, development, and production firms with large, proven reserves.

Among the companies currently in our portfolio, particularly good buys right now include Auryn Resources (TSV: AUG), GoGold Resources (TSX: GGD), Klondex Mines (TSX: KDX), and Pershing Gold (PGLC).

Continue to accumulate these junior mining companies. In my view, they represent outstanding long-term buys, in any case, and the argument for owning them is only bolstered by the short-term rally we now expect to begin.

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